How can we improve procurement of innovation?

Interview with Dr. Ramona Apostol, a Senior Procurement Researcher with Covers Procurement Services. She’s also regular guest lecturer at various academic procurement programmes all over the world. Ramona concluded her PhD at Leiden University in 2014 and is an expert in Procurement of Innovation. Finally Ramona is involved in the European Assistance for Innovation Procurement project aiming to support public procurers in implementing more and better innovation procurements of ICT-based solutions across the EU.

Transcript

My pleasure. The first question I have for you today is precisely Procurement of Innovation, why do you think it is important or is innovation just a buzzword?

I think Procurement of Innovation is important for two main reasons. Firstly the government is a provider of services to its citizens. To provide the services the government is using technologies and services purchased from private market players. By purchasing these innovations to deliver public services the government can provide better services. Take the example of the so-called thirsty asphalt on the highways in the Netherlands, a country where I can tell you it rains a lot. By replacing ordinary asphalt with innovative asphalt that absorbs several thousands of litre of water per minute, the Dutch Ministry of Infrastructure and Environment improved visibility on highways which led eventually to better traffic flows and less accidents during heavy rains. And this illustrates how Procurement of Innovation delivers immediately and direct benefits.

But Procurement of Innovation is also important in a more indirect way and this is because the government ultimately holds the responsibility for the economic and social welfare of its citizens. To this end the government needs to create the proper framework conditions for a well-functioning economy. It needs for example to improve access to affordable resources to local company in a global context where natural resources are diminishing, where there is an increasing population and rising competition between governments to get access to these resources. So this explains the government’s interest to stimulate the development of innovative alternative sources of, for example, raw materials or energy.

In the same line of thought I think by purchasing innovation the government can provide innovative companies with earlier revenues which allow them to refine their innovative products up to the point when they can compete with incumbent products on the market. In this way through Procurement of Innovation the government can sustain the growth of these companies and it’s common sense that successful local companies mean employment, mean increased tax income for the government, and mean cheaper and more qualitative products.

So this is in simple and general lines the main reasons why Procurement of Innovation is important. And maybe it’s also important to make clear from the beginning that there are two main approaches to Procurement of Innovation and these are called Pre-Commercial Procurement and Procurement of Innovative Solutions. It’s PCP and PPI. Of course your audience will be familiar with these two forms of procurement but it might be useful to still explain what exactly they are and I would start with Pre-Commercial Procurement which is the procurement of R&D services. This is based on an exemption included in the procurement directives for R&D services involving risk share between procurers that get involved in this procurement, it involves competitive development in phases and involves a clear separation between this procurement of R&D services and the procurement of the final product, so the deployment of the commercial volumes of the end product. The European Commission has defined in 2007 guidelines on how to use this exemption and how to implement legally compliant procedure based on this exemption.

On the other side you have Public Procurement of Innovative Solutions, the PPI, which can be complimentary to PCP but can also be conducted individually, not in the continuation of PCP, and it means the purchase of an innovative good or service that has already been developed so the development stage is finalised but these innovative goods or services are not yet available on a large scale commercial basis and they still need some conformance testing before being deployed within the organisation of a public procurer.

That is the theory behind why Procurement of Innovation is important but if you look at the practice and if you look at how contracting authorities are conducting procurement in general, we don’t see many contracting authorities paying a lot of attention to Procurement of Innovation. In your views what are the reasons behind this?

Yes you are right, although I believe that things are starting to change. Indeed about a decade ago policymakers at both national and EU level they realised that procurement budgets were not sufficiently spent on innovation and there is a huge amount of money involved in procurement, we are talking about two trillion euro in the EU per year and this is, means 19% of the GDP. So the European Commission and several European member states have done efforts to change this situation.

They also were aware that it is not easy to bring this kind of change and I would name a couple of reasons why public procurers do not widely conduct innovation procurement. First of all innovation involves risks and procurers, there are in procurement surely penalties related to failure of procurements but often there are no rewards related to a success so there is no direct incentive for a procurer to engage in innovation procurement to take these risks. So this has also to do with a lack of institutional incentives with disconnection between procurement which is first of all an administrative task, it is about buying something that the procuring organisation needs for its functioning and it is disconnected from the more policy goals that the same organisation or the ministry under which this organisation might fall has and what I was talking about earlier, you know, improving the public service and supporting, incentivising companies to become innovative and grow more and generate more economic outputs.

Another important reason that was often indicated by procurers as being a barrier to involvement in innovation procurement is lack of clarity of legal rules and particularly fear of breaching EU state aid rules. And also at least in the form that is envisaged by the European Commission for PCP and PPI, namely the cross-border collaboration between procurers, these kind of PCPs and PPIs are complex in organising, the coordination between procurers from different member states requires increased efforts and they are often time consuming.

Also innovation procurement in order to minimise the risks that are related to it requires a careful preparation which also takes time and requires expertise and capabilities that procurers often do not have in-house and are not willing to take the effort to gain those, and it requires careful definition of their needs, careful definition of the specifications, advanced specifications that would reward innovation proposals, requires market scouting, consultation, and lastly but not least is budget restrictions. Often buying a first batch of innovation will be more costly and particularly in the ICT sector switching from one incumbent technology to a new one will involve high learning and switching costs or procurers as users.

So these are the main reasons that have often been invoked by contracting authorities for not doing innovation procurement more widely and these barriers are in the mind of policymakers today at European and national level.

I think those reasons are very interesting and by and large I agree with them. In my dealings with contracting authorities in multiple member states there’s certainly a cultural fear of making mistakes so it’s much easier for you to avoid risk or try to reduce risk because at the end of the day you are promoted on the basis of not effectively screwing up. So if you’re taking on risk, yes things can go well but they can also go wrong, and if they go wrong someone is going to be out there to blame you for the failure?

Yes. The penalties are more visible than the rewards of…

Of course. That is one of the problems with KPIs or the lack of KPIs for example that can measure those potential benefits. But this brings to mind the old saying that no-one was ever fired for buying stuff from IBM and it’s still true in public procurement to a certain extent which is if you have an established technology, if you have an established incumbent which is solving your problem, okay what is your incentive to effectively going looking for a better solution because that may not exist, certainly it’s going to incur a cost because you need to prepare yourself, you need to use different procedures that take longer and are more expensive to run, so on and so forth. So I understand that sometimes can be really difficult for procurers to actually find a motive to going for innovation?

Yes. Sometimes they have real clear motives to do it, for example the old solution is, becomes costly because of, take the example of water boards in the Netherlands. They had increasing number of sewage water purifying stations and they needed to gather all this data from all these stations and it was done in a very inefficient way with data storage at each location and it was increasingly costly so they needed to go for an innovative solution, for a new solution, but why go for the real innovation element, that’s the tricky part. It really needs support from top management and it needs to a certain extent a culture of innovation within the organisation.

I think that’s a very important point because one of the things that I’ve seen as well is, and this has been discussed also in the literature, which is procurers at the coalface, the people actually doing the procurement, you have way too many people doing those roles and they’re not given the skills or the training necessary to understand how these new ways of procurement work, so by definition they’re going to default for whatever the organisation has been using for the last ten or fifteen years. I think that is very prevalent?

Yes, I agree. It happens currently also bottom-up, you know, there are procurers that see the opportunities that innovation is offering, they have a project in mind, they go and they support the case for that procurement with the top management, they obtain the approval to go on with those projects, but the real change needs to come top down, I agree. And there are only in several member states national initiatives for bringing this change and also at European level there are measures that are being taken to change that.

One of the things I find relevant as well to discuss about Procurement of Innovation is how Procurement of Innovation in a sense marks a completely new direction for rules in public procurement. The way I usually describe this is if we look at procurement rules over the last forty or fifty years they exist to avoid really bad procurement so they are there almost as a safety net. So that’s why in the open procedureyou don’t have a lot of discretion, you’re effectively creating something that is easy to use, more than easy to follow, easy to use for procurers so that they can apply time and time again without having to take too many decisions, too many risks, and without having a lot of discretion?

Yes, you’re right. You’re right. I agree. Innovation procurement requires discretion. That is why actually Pre-Commercial Procurement or procurement of R&D services is exempted from the procurement directives. And this is exactly the reason why because the procurer needs discretion in formulating, in getting in contact with the market, formulating its need, its specification, and potentially changing those specification depending on the course that the development takes, development of the solution. Because of course you cannot predict once you start with a Pre-Commercial Procurement which way or whether the solution might come up during the development, it might become apparent that another course for the innovation solution would be better and more beneficial.

So they need this discretion and this is exactly why PCP is exempted, there are still rules applicable, you still have the treaty fundamental principles that remain applicable, particularly in the case of PCP as envisaged by the European Commission because it’s a cross-border PCP, there is a European dimension to it, there is a cross-border interest related to it, so it still falls within the treaty for the functioning European Union.

Moving on, what can you tell us that you’ve learned over the last ten years with Pre-Commercial Procurement projects and research?

Well of course we learned that this behavioural change is difficult in the absence of political mandate and in the absence of suitable capability creation schemes. The EU from the beginning they have looked at the benefits that the US programme particularly in the field of R&D procurement has brought to the US and they have tried to duplicate those results in the EU but they have realised that they need to take the effort, undertake real efforts to bring this change in European Union.

But we also saw that in ten years since they’ve started these initiatives there has not been the expected progress and in my opinion this is due to couple of reasons. First of all insufficient analysis of the prerequisites for successful implementation and second unclear or difficult legal framework and I’m particularly referring to the EU state aid rules. Thirdly I think they didn’t realise how important it is to target the right actors that are capable of implementing these kind of procurement and not the innovation agencies at national levels that have actually implemented the most advanced schemes in innovation procurement but that are actually used to grant subsidies and not conduct procurement, they are not the end users of the innovation that would be developed through an R&D procurement. So I think these are a couple of the main reasons why the expected results have not been achieved so far.

There is also the side of lack of competence at EU level to legislate on innovation in the innovation area so it’s up to national states to set mandatory targets to legislate on Procurement of Innovation, and the EU has only the competence to coordinate and to support and try to convince member states to go ahead with these kind of policies and with their implementation.

We have also seen in the ten years we’ve kept in mind and actually recently the commission has funded a project to quantify the benefits of Pre-Commercial Procurement, not of innovation procurement in general but specifically of Pre-Commercial Procurement because procurement of R&D is more difficult, it’s more risky but it also promises the most benefit. The project, the smart project has conducted questionnaires, interviews as analysed Pre-Commercial Procurement that they identified in the EU and they found evidence of positive impact. What they didn’t find evidence then they tried to look at the US and show that there is potential for enormous benefits from these kind of procurements. What they showed is that they confirmed that Pre-Commercial Procurement leads to improvement of the quality and efficiency of public services and that conducting a PCP previously to a PPI would reduce risks of failure in the PPI and also in terms of costs often this would be justified, so the cost of conducting a PCP would still be outweighed by the benefits of avoiding failure in a subsequent PPI.

They also realised that Pre-Commercial Procurement facilitates the access of more businesses and they saw that PCPs conducted in collaboration by procurers from different European member states attract, in 75.5% of the cases are won by SMEs and in 81% of these cases the SMEs are small, are under fifty people. But they also realised that Pre-Commercial Procurement it reduces risk of single supplier lock-in so at the end of the PCP you will be sure that you have competition, that you would have a technology that is developed according to the needs of the procurers, that at least two competitors are capable of developing competitive solutions, that you have the choice and you have the competitive pressure on the prices of the solution that the procurer would eventually need to procure. Of course not one of these two solutions that come out of the PCP but projects that have developed in the same time outside the PCP would also be invited to compete.

And yeah, it is also very beneficial that doing a PCP because it increases the possibility to achieve interoperable solutions between procurers from different member states. It saves the costs of adjusting these technologies or adjusting commercial available technologies later to be interoperable or to fit perfectly the needs of the procurers.

Moving on to one of our final questions. You’re also involved in a project called European Assistance for Innovation Procurement, what are you trying to achieve with that project?

As I told you the European policy, EU policymakers have taken steps in incentivising innovation procurement since a while now, so a couple of initiatives have preceded EAFIP and I will shortly give you an overview of those.

In the European Commission in the field of PCP particularly in 2007 they drafted this communication recommending a certain approach to the procurement of R&D services in, fully in line with the legal framework in order at least to take away the legal risks that were seen by procurers. Subsequently in 2009 after listening to procurers and to the barriers involved by them they took additional steps in addressing these barriers and they funded the formation of procurer groups and they funded networking activities. So they thought, at that stage they thought the missing link is procurers funding each other in conducting PCPs but soon that became apparent that was not sufficient so didn’t lead to the emergence of the good practices they expected. As a consequence they went a step further and they thought okay, organisation of cross-border PCPs is complex, is costly, time consuming, we will fund 100% of the organisational costs of these PCPs and as long as they involve at least three procuring authorities from different member states and we will also fund part once the procurement procedure is completed and you go on with the contract, you close the contract with the companies, they would fund also part of those contractual costs.

There are currently fourteen ongoing PCP projects funded by the European Commission. The first one was started in January 2012 and it’s set to be completed in forty-five months so we are still a while from seeing the first result. There are also funding activities for PPIs. These have focused particularly on creation of networks of procurers. There are seven projects funding networking activities for the preparation of the Procurement of Innovation for identifying common needs, for identifying partners to conduct PPIs together, for engaging in dialogues with the market. More recently though they have stepped up these measures also in the field of PPI and they have funded consortium of local and regional procurers, it’s called the Stop and Go Project, that procurers that actually plan to launch together four tenders for Procurement of Innovation solutions.

So EAFIP comes, is in line with these initiatives. What it aims to do is actually to bundle the existing knowledge on how to conduct innovation procurement. We have, Corvers Procurement has been, actually we are conducting this in collaboration with our partner in Brussels, STELLA, and we have been selected because we have knowledge on innovation procurement, we have been experts, independent experts for European Commission, we have been following the European funded, EU funded Pre-Commercial Procurements and Procurements of Innovation for years now and we have a lot of knowledge in-house and we should also bundle the knowledge that comes from all these EU funded procurements and from national level implemented procurements into a toolkit. And that would be conveyed to procurers through twelve events and through a couple of webinars throughout the project’s three years lifetime.

The project started at the beginning of this year and it’s due to, for completion the end of 2017. But creating a toolkit, disseminating, it’s not something really new. What is new that the toolkit is really following each step and it tries to be really practical and doing the state of the art knowledge at each step. It goes into needs identification, then goes into prior [?? 26:08 art] analysis, IPR search, drafting a business case, then you go to market consultation, then you draft your intellectual property rights and confidentiality strategies, you set the link to standardisation and only after that, these are all really early preparatory stages, you go into the drafting of the tender documentation. And this completes the preparatory stage and after that you conduct the procedure is select, actually select the winning companies and during the execution of the contract you also perform monitoring and evaluation of the performance.

When will the toolkit be available?

The toolkit is pending approval for publication from the European Commission. We expect that the latest beginning of next year will be available on the website of the EAFIP and the website is just eafip.eu.

Okay.

And the new feature of this project is the free assistance to contracting authorities who take the initiative to implement innovation procurement without EU funding. So the project aims to identify twelve projects that will be selected for free assistance from the project experts and the project partners. So they will be selected, they can apply until 10th of November but probably the deadline will be extended and there will be flexibility whenever really suitable project will come to the attention of the partner, the consortium. And it will be selected on basis of several criteria such as importance of the targeted solution for solving public problems or the intention to bundle forces with procurement from other member states.

Brilliant. We have to leave it there because we’ve gone over our half an hour, so thank you very much for coming to the show Ramona.

Thank you for inviting me. It was a pleasure.

As usual you can find me at my blog telles.eu or on Twitter where I use two handles, @Detig for general discussion and @publicprocure for public procurement related topics. I’m very grateful as usual as well for the support of the British Academy Rising Star Engagement Awards.